Archive for May, 2009
A few circles I'm lucky enough to run with have been circulating a recent post from the equity-centric finance blog Zero Hedge that purports to show "negative mortgage spreads."
I've seen some breathless commentary around this issue, but before we go and raise our blood pressure, it would benefit everyone — especially equity traders, apparently — to have a quick refresher on mortgage spreads, how they're calculated, and what they mean. Because without that, you might think the secondary market was facing some sort of imminent crisis, after you decided to graph Fannie Mae current-coupon bonds against something like 30-year Treasuries on your Bloomberg terminal.
Let's start with the anonymous author's comment on the analysis in question:
The next chart compares the 30 Yr UST with the 30 Yr FN current coupon (MTGEFNCL). Welcome to the bizzaro world of negative mortgage spreads: somehow a 30 year mortgage has become cheaper than US Sovereign debt…Maybe taxpayer subsidies into Fannie/Freddie have something to do with it?
Any mortgage analyst worth their salt — make that any CFA worth their salt, for that matter — should immediately notice what's wrong with the above analysis: a duration mismatch, and of the most basic and utterly inexplicable kind. Which means the chart is pretty meaningless, as is any sort of speculation that a "negative mortgage spread" is due to taxpayer subsidies. Those of you out there in primary/originator mortgage-land that have seen this and freaked out over it can calm down, and quit emailing this to me. There is no negative mortgage spread.
Actual mortgage spreads against Treasuries — "real" mortgage spreads, if you will — are calculated against an interpolated 7.5yr Treasury bond, meaning the prices of the 5 and 10-year notes. The reason here is simple: the duration of an average U.S. mortgage is between 5 and 10 years, due to voluntary and involuntary prepayments for most borrowers. Calculating the spread between two bonds with wildly different durations does little to tell anyone anything about perceived credit risk. In fact, it does little to suggest much of anything at all.
Had the author calculated spreads correctly, s/he would have found a far different picture of what's been going on with mortgages:
The above data is courtesy of UBS, from a dear colleague; it's an update to a chart we publish each month in HousingWire magazine. "Real" mortgage spreads here have actually been below 150bps since late April — a good sign, and at least resembling their long-term averages over the past 10 years. Does this mean market distress is gone? Of course not, but it does suggest that all of the Fed buying as of late has had a clearly calming effect; the longer-term questions, as of yet unanswered, are how much more does our own government need to buy of our own mortgage securities? And what can be done to bring foreign buyers back into the mix?
Both are questions I won't delve into in this particular op-ed, but it should be clear from the "real" spread chart provided above that at least some parts of the mortgage markets have settled down considerably since the government took over the GSEs last November.
Like anything in life, how you see the world is a function of not only the data and tools you have, but how you use them.
Write to Paul Jackson at paul.jackson@housingwire.com.
Federal Deposit Insurance Corp. chairman Sheila Bair appointed Michael Bradfield the agency's new General Counsel. The appointment was unanimously approved by the FDIC Board of Directors and became effective today.
The FDIC General Counsel is in charge of the legal division, which is responsible for legal work on regulatory issues, as well as FDIC transactions, litigation, and corporate and commercial claims.
"I'm very pleased to have Mr. Bradfield join the FDIC," Bair said. "His depth of knowledge of domestic and international banking issues as well as his extensive expertise at the Federal Reserve Board and the U.S. Treasury will serve the FDIC well at a critical time."
Bradfield concentrated on domestic and international banking, mergers and acquisitions, federal bank regulatory matters and international trade during his time at law firm Jones Day,.
Bradfield also served as General Counsel of the Federal Reserve Board in Washington, advising Chairman Paul Volcker and Chairman Alan Greenspan. He was responsible for the legal work of the Board, including the legal aspects of monetary policy formulation, regulation, litigation, enforcement, administration and legislation.
Prior to becoming the Federal Reserve's General Counsel, Bradfield was in private law practice with Cole Corrette & Bradfield. From 1968 to 1975, he served as Assistant General Counsel of the Treasury Department where he participated in the formulation of international monetary and trade policy. He also worked with the Multilateral Development Banks and the International Monetary Fund.
Write to Kelly Curran at kelly.curran@housingwire.com.
Internet advertising in violation of fair housing laws, combined with the worsening foreclosure crisis, caused housing discrimination to spike nationwide, the National Fair Housing Alliance (NFHA) said Friday in its 2009 Fair Housing Trends Report.
The report concludes 93 private non-profit fair housing organizations processed almost twice as many cases of discrimination — made on the basis of race, color, national origin, religion, sex, familiar status and disability — last year as the US Department of Housing and Urban Development (HUD), the US Justice Department, and 107 state and local government agencies combined.
NFHA officials said private fair housing centers around the country saw more cases of discrimination in mortgage lending than ever in 2008. In disproportion, HUD initiated four investigations into lending discrimination last year and the Justice Department pursued only one mortgage lending case.
In addition, the report said HUD handled 60 fair lending complaints in 2008, compared with 1,500 complaints handled by private fair housing centers.
"Fair housing advocates have been warning the federal government for a decade, to no avail, about the damage that abusive lending would bring," said Shanna Smith, NFHA president and CEO. "For too long, HUD and the Justice Department have stood by while people and neighborhoods of color have been targeted for predatory loans and stripped of equity."
NFHA said it attributes the increase in complaints to the large number of discriminatory housing ads on the internet. NFHA alone filed more than 350 complaints based on internet advertising discrimination with HUD last year. Officials claimed in a media statement that "HUD refuses to use its subpoena power to find the individuals posting discriminatory ads," the majority of which discriminate against families with children.
But NFHA's statement fails to acknowledge challenges HUD faces with its staffing and resources. In prepared comments for an early April Senate subcommittee hearing, HUD secretary Shaun Donovan acknowledged the department, and particularly the Federal Housing Administration, needs updated information technology systems and increased staff.
The US Senate last week voted 92-4 in favor of Senate bill 386, called the Fraud Enforcement and Recovery Act, which provides $490m over the next two fiscal years for mortgage fraud investigation by regulatory agencies like HUD.
The legislation allows $75m in fiscal year 2010 and $65m in fiscal year 2011 for the FBI to use its resources to go after suspected fraudsters. Furthermore, $50m goes to the US Attorneys’ office. Up to $40m in funding goes to the Justice Department, to be shared among the criminal, civil and tax divisions. The legislation also would provide $30m each fiscal year to HUD's Inspector General for investigation of fraudulent and discrimatory cases like those reported by NFHA.
Write to Diana Golobay at diana.golobay@housingwire.com.
Pending home sales climbed in March with many first-time buyers taking advantage of sharply discounted prices and low interest rates, according to the National Association of Realtors.
The pending home sales index, a forward-looking indicator based on contracts signed in March, increased 3.2% month-over-month to 84.6 and sits 1.1% higher than March 2008.
"This increase could be the leading edge of first-time buyers responding to very favorable affordability conditions and an $8,000 tax credit," enacted by the Obama administration for first-time home buyers purchasing a home on or after Jan. 1, 2009, and before Dec. 1, 2009, says Lawrence Yun, NAR chief economist. "We need several months of sustained growth to demonstrate a recovery in housing, which is necessary for the overall economy to turn around."
The Pending Home Sales Index in the South rose 8.5% to 93.2 in March and is 7.7% above a year ago. In the West, the index increased 3.9% to 93.1, while the index in the Northeast fell 5.7% to 59.5. Pending home sales in the Midwest also slipped a slight 1.0%, posting an index reading of 82.3.
NAR's Housing Affordability Index remained near record highs in March. The affordability index was 166.7 in March — down from an upwardly revised record of 174.4 in February due to higher home prices in March. The index remains 30.8 percentage points higher than a year ago.
"Compared to a year ago, the typical family can pay much less in mortgage costs for the same home, or buy a better home without necessarily increasing their monthly payment," says NAR president Charles McMillan. "For buyers who've been on the sidelines and have good jobs, the market has never looked more favorable."
NAR says a median-income family, earning $61,100, could afford a home costing $291,600 in March with a 20% downpayment, assuming 25% of gross income is devoted to mortgage principal and interest. Affordability conditions for first-time buyers with the same income and small down payments are roughly 80% of that amount. The affordable price was notably higher than the median existing single-family home price in March, which was $174,900.
Nonetheless, the payoffs of increased home buying activity aren't showing yet.
A separate report released Monday by the Commerce Department shows construction spending on residential projects fell 4.2% in March. But overall construction spending rose in March, boosted by spending in nonresidential buildings and public works. Economists were expecting a 1.5% decline, according to a Market Watch report, but overall spending actually increased 0.3%, as January and February spending was also revised higher.
Write to Kelly Curran at kelly.curran@housingwire.com.
Amherst Securities Group is continuing its hiring spree by adding a new team of mortgage-backed securities (MBS) and asset-backed securities (ABS) salespeople at its Chicago office.
The firm appears to buck the trend that anything linked to the securitization trade is in a hiring quagmire. Recently, the Austin-based company started to pull talent from ailing or collapsing firms.
Ryan Mullaney, a former Managing Director at RBS Greenwich Capital whose career in MBS sales spans 24 years, has been appointed to manage the Chicago office. Joining him are Michael Brunso, Michael Carothers and Ryan Clinton, all of whom will work in sales beginning today and who also previously worked at RBS Greenwich Capital.
Sean Dobson, CEO of Amherst says of the new staff: "Their analytical approach, innovative ideas and existing relationships on Wall Street are a perfect fit for Amherst's entrepreneurial culture and will add tremendous value to our customers."
A 15-year veteran, Mullaney will manage the new Chicago office, serving as the licensed General Securities Principal. Mullaney also knows his way around the CMBS, agencies, rates and derivatives space.
Brunso is equally diverse, selling mortgage-backed, asset-backed and commercial MBS for the last 13 years. Prior to that, Brunso worked at Merrill Lynch for ten years in MBS and ABS sales. Mullaney shares history with Merrill Lynch as well.
Carothers held the role of managing director in MBS and ABS Sales and covered top-tier money managers, commercial banks, FHLB's, insurance companies and hedge funds at RBS Greenwich. Carothers, like Brunso and Mullaney, also worked for some time at Merrill.
Write to Jacob Gaffney at jacob.gaffney@housingwire.com.
Federal regulators shut down another three banks Friday as the US banking sector continues to absorb recession-related losses.
All told, Friday’s failures will cost the Federal Deposit Insurance Corp.’s (FDIC) insurance fund an estimated $1.44bn and put a total $4.44bn in combined assets on the line for purchase or disposition.
They mark the 30th, 31st, and 32nd failures so far in 2009.
The FDIC created a bridge bank to take over the operations of Silverton Bank after the Office of the Comptroller of the Currency shut it down. Silverton Bank as of the time of closing held total assets of $4.1bn and total deposits of $3.3bn, all of which the FDIC expects is insured. The FDIC expects a $1.3bn cost to the insurance fund and contracted The Independent BankersBank to provide operational management of Silverton Bridge Bank.
Read the FDIC’s statement on Silverton Bank.
The Utah Department of Financial Institutions closed America West Bank. Cache Valley Bank agreed to purchase all of the failed bank’s deposits at a discount of $352,000 as well as $10.9m in assets. America West boasted as of year-end total assets worth $299.4m and total deposits worth $284.1m. Its failure will cost the insurance fund an estimated $119.4m.
Read the FDIC’s statement on America West Bank.
The New Jersey Department of Banking and Insurance closed Citizens Community Bank and named the FDIC receiver. Citizens Community Bank's sole office reopens today as a branch of North Jersey Community Bank, which assumes all of the failed bank deposits and approximately $11.5m in assets. Citizens Community as of year-end 08 boasted $45.1m in total assets, with $43.7m in total deposits. North Jersey Community paid a 0.67% premium for the failed bank’s deposits and also agreed to purchase $11.5m of the failed bank’s assets, the remainder of which the FDIC will retain for later disposition. Citizens Community’s failure will cost the Deposit Insurance Fund an estimated $18.1m.
Read the FDIC’s statement on Citizens Community Bank.
Write to Diana Golobay at diana.golobay@housingwire.com.
Business information provider The First American Corp. (FAF: 14.98 +0.07%) posted $36m in net quarterly profit — or 38 cents per share — for Q109 from $29.3m in the year-ago period.
The quarter's return to profit compares with $67m in net losses posted in Q408.
"The company benefited from a surge in origination and default-related transaction activity, as well as continued expense reductions," says chair and CEO Parker Kennedy in the earnings statement.
FirstAm also posted $1.4bn in total revenues, which slipped 17% from the year-ago quarter. Corporate expenses fell 26% from the prior-year period, while the company saw order volumes across all mortgage-related businesses increase over last year.
The company's insurance operations posted a substantial quarterly increase in open orders, according to company executive Dennis Gilmore. FirstAm's Title Insurance and Services business segment saw $792.4m in total quarterly revenue, a 26% slide from the year-ago period. The company's direct operations closed 369,200 title orders for Q109, a 5% decrease from title orders closed in Q108.
"Orders are taking longer to close as a result of the backlog in the mortgage lending industry, but we have a strong inventory of orders that are expected to close in the second quarter," Gilmore said.
Read First American's earnings statement.
Write to Diana Golobay at diana.golobay@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
Mortgage Spirit, a provider of loan search and pricing revenue management technology, released version 3.0 of its loan search and pricing engine, which the company says enables mortgage originators to stay in full compliance with the pending requirements and legislation dictated by the HUD-reformed Good Faith Estimate (GFE) requirements for 2010.
"Lenders need to immediately begin preparing their staff for the 2010 requirements set by HUD, particularly those associated with the GFE, or they will face a rude shock that will tie directly to their pocketbooks," said Joel Horn, president of Mortgage Sprit.
Mortgage Spirit's updated version automatically generates a .pdf file of the new GFE's language and guidelines within Mortgage Spirit's system. It includes all Real Estate Settlement Procedures Acts (RESPA) reform considerations, and effectively yields accuracy between revenue, closing costs and transfer tax figures listed on the GFE and HUD-1 at closing.
"The latest version of our pricing and search engine was designed to handle the cumbersome new GFE format and assist loan officers to seamlessly adopt to the culture's new language and stay in full compliance with every delivery of the GFE," Horn said. "If Congress makes further alterations to these requirements, our system's framework is highly flexible and adaptable to keep users in full compliance."
Citigroup (C: 30.87 +1.61%) and Bank of America (BAC: 7.29 -0.14%), two of the largest financial firms reported to lack necessary capital under federal regulators' stress tests, are racing to raise more than $10bn apiece in private capital.
The inner-circle moves are meant to come as a supplement beyond the billions of dollars in TARP funds already received, unnamed sources told the Financial Times. The ability to raise such levels of private capital would show investor confidence in the firms. And for some of the banks, failure is not an option.
Citi is in discussions to force holders of more than $15bn of trust preferred shares to transfer to common stock. Citi may threaten to cease interest payments to stock holders that refuse, sources told Financial Times.
The conversion of this stock may stave off further government intervention, including the conversion of the Treasury Department's investment into common stock, creating something of an ownership stake in Citi.
The federal regulators are scheduled to present the remaining test results to 19 banks today and make the results public later this week, possibly as early as Thursday. In the face of public uncertainty over the details of the test results, Berkshire Hathaway (BRK-A: 119211.00 -0.20%) chairman Warren Buffett at a Sunday press conference said at least 15 of the 19 banks were not too big to fail.
"Those banks could fail and be transferred to other lenders without it costing the taxpayer anything," Buffett said, according to a MarketWatch bulletin. "Those 15 for sure would find a home if the [Federal Deposit Insurance Corp.] decided to move on them next weekend."
Write to Diana Golobay at diana.golobay@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
Yes, it's come to that: a horror film about mortgage lending.
Okay, so maybe the fright, suspense and gore isn't directly related to mortgages, but the premise of director Sam Raimi's film, Drag Me to Hell, appears to center around a young, aspiring loan officer who, for the sake of prudential lending standards, must refuse to grant a third extension on the mortgage payment of a frail, elderly borrower, despite her pleas for mercy.
And who would've thought that a director with so many other outstanding horror creds, such as Evil Dead, Evil Dead II, Army of Darkness, Darkman and The Gift, could find a way to top himself yet again?
But he does.
In Drag Me to Hell, the loan officer's moral turmoil on the decision is evident: "We would have to throw her out of her house," says the character, played by Alison Lohman, to her boss at one point early in the movie's trailer.
Her tough decision — which the viewer is lead to believe will mean the definite promotion to assistant manager and a sweet corner office with windows — could not, would not possibly result in her downfall…
Or will it?
That's where the ghosts and ghouls come in; The frail, pitiful borrower turns out to be some sort of witch or demon (and maybe they all are) who casts a curse to torment the loan officer, whom the viewer knows is doomed for eternal damnation, courtesy of the flick's title.
Or is she?
The film is sure to have loan officers quaking in their theater chairs asking themselves that age old question: "Oh why didn't I grant that third extension today? WHY!?!?"
Set to hit box offices May 27, the film promises plenty of horror and suspense… although we can think of little more horrifying than the harsh realities of the housing debacle making its way into mainstream Hollywood.
Jacob Gaffney contributed to this report.
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